Signing Away Rights

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In the fall of 2011, Career Education Corporation (CECO) revealed that a significant number of its schools had cooked the books on the job placement rates they were disclosing to prospective students and regulators. Now investors in the giant for-profit higher education company are about to earn a nice profit for these misdeeds.

A federal judge has given his preliminary approval to a $27.5 million settlement that CECO has reached with shareholders to put an end to a lawsuit they brought accusing the company of deceiving them about its record of placing graduates into jobs. In contrast, most of the students who were the direct victims of this deception – with the exception of students from New York State who attended CECO’s campuses – are unlikely to receive any relief for these abuses. Instead, students who enrolled in these schools based on false promises will be stuck paying off loans they took out to pay for these programs for years.

What accounts for this disparity? The answer is that investors in for-profit colleges have access to the courts for filing their grievances, while most of the sector’s students do not.

Mandatory arbitration agreements – which have become increasingly common in all sorts of consumer contracts, including those for credit cards and private student loans – put students with legitimate grievances at an extreme disadvantage compared with pursuing their cases in court.

For one thing, for-profit colleges select the third-party arbitration company that is going to hear the case, creating an incentive for arbiters to go easy on companies in order to get repeat business. Binding arbitration clauses tend to bar class actions, forcing each student who has been harmed to bring his or her individual case against the schools. Industry officials know that many students are unlikely to pursue their cases because of the cost of doing so. In addition, discovery is often limited in arbitration cases, making it difficult for students to gather evidence of wrongdoing. And arbitration decisions generally cannot be appealed.

Although many for-profit college companies have included mandatory arbitration requirements in enrollment agreements for years, these clauses were not always ironclad. Some states, like California, have long had consumer protection laws that frown on the use of binding arbitration requirements banning class actions and jury trials. Courts in those states have previously allowed students scammed by unscrupulous schools to move ahead with legal challenges.

However, in 2011, the Supreme Court changed the rules of the game. In the case AT&T Mobility LLC v. Concepcion, the nation’s highest court ruled that states can’t reject arbitration clauses as “unconscionable” solely because they bar class action lawsuits and jury trials. That decision has shut down access to the courts for most for-profit college students, as well as for consumers of most financial products.

Even judges sympathetic to students’ complaints say their hands are tied as a result of the Supreme Court’s ruling. In his opinion in a case that students brought against Westwood College accusing the company of major recruiting abuses, Judge William J. Martinez of the U.S. District Court in Denver wrote in 2011 that he regretted having to require the plaintiffs to settle their dispute through arbitration. “There is no doubt that Concepcion was a serious blow to consumer class actions and likely foreclosed the possibility of any recovery for many wronged individuals,” he stated.

Students aren’t entirely out of luck. The U.S. Department of Education will, under very limited circumstances, discharge the loans of students who have been defrauded. Students may also benefit from settlements that the U.S. Department of Justice or state attorneys general reach with for-profit college companies, although the restitution provided in these cases is seldom sufficient to cover students’ full debt loads. For instance, students from New York who attended Career Education Corporation campuses in recent years and have not found employment in their fields of study will receive some compensation, as a result of a settlement that the New York Attorney General reached this summer with the company over its faulty job placement rate claims. Students in other states who were similarly misled, however, are out of luck.

Congress should eliminate this injustice by barring colleges that participate in the federal student aid programs from including binding arbitration clauses in enrollment agreements, just as Democratic Senators Tom Harkin of Iowa and Al Franken of Minnesota proposed last year. As they wrote, “Colleges and universities should not be able to insulate themselves from liability by forcing students to preemptively give up their right to be protected by our nation’s laws.”

Students who have been harmed by institutions should not have fewer legal rights than investors in these companies. The real victims of abuse deserve to have their day in court too.